Hard times ahead for a politically divided Timor-Leste

2018 started with political chaos in Timor-Leste. Historical disputes between independence hero Xanana Gusmao and the parties he has been able to bring into alliance against the Fretilin party resurfaced as a result of stark differences in approaches to how best secure Timor-Leste’s challenged future, writes Damien Kingsbury.

Timor-Leste started the year in political chaos and ended it with a return to the confrontational politics of the past. Cooperation between the National Congress for Timorese Reconstruction (CNRT) and the Revolutionary Front for an Independent East Timor (Fretilin), which had together run the country since 2015 under a ‘government of national unity’, was shattered following the July 2017 elections.

The aftermath of the elections saw Timor-Leste enter 2018 with a majority opposition alliance, which blocked the minority Fretilin government’s budget and called on President Francisco ‘Lu-Olo’ Guterres to install it in office. Mr Guterres – who is also President of Fretilin and was elected with key cross-party support in the final months of the government of national unity – refused. Instead, he called fresh elections for May 2018.

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The 2018 elections returned the opposition Alliance of Change for Progress (AMP) coalition – comprising CRNT, the People’s Liberation Party and the Kmanek Haburas Unidade Nasional Timor Oan (or KHUNTO) – as the new government. But following allegations of corruption against eight proposed ministers, Mr Guterres refused to swear them in.

Three other proposed ministers refused to be sworn in as a show of support for their colleagues, leaving Timor-Leste without ministers of finance, health and natural resources, among others. Mr Guterres initially refused to pass the late 2018 budget. The government in turn refused to approve a visit by Mr Guterres to the Vatican, saying that domestic matters took precedence. Mr Guterres then vetoed the government’s bid to use money from the Petroleum Fund to buy a stake in the Greater Sunrise liquid natural gas field.

Mr Guterres’ rejection of the budget reflected his concern over Timor-Leste’s financial sustainability and opposition to the government’s use of central bank funds to further its ambitious Tasi Mane development project. The government required an unavailable two-thirds majority to overrule the President’s proposed veto.

The government intended to establish a liquefied natural gas (LNG) processing plant on Timor-Leste’s Tasi Mane south coast to kick-start a petrochemical industry that could provide jobs and income into the country’s future. But the Greater Sunrise joint venture partners, who hold the rights to develop the energy reserves, rejected the proposal as unfeasible. A major issue was the plan to build a 150-kilometre undersea pipeline, which would have had to cross the deep-sea Timor Trough.

The Timor-Leste government spent $350 million in October 2018 to purchase ConocoPhillips’ 30 per cent stake in Greater Sunrise. And in late November, an agreement was reached for the government to buy Royal Dutch Shell’s 26.56 per cent stake for $300 million, bringing the government’s total holding in the project to 56.56 per cent.

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Yet Timor-Leste’s 2005 Petroleum Activities Law restricts the state to a maximum of 20 per cent equity in the project. Timor-Leste may need to sell some of its stake to a new partner, possibly from China or South Korea.

The remaining Greater Sunrise partners, Woodside Petroleum and Osaka Gas, oppose the idea of a south coast processing facility. If the plan is to proceed, this could leave the roughly $5 billion cost of development to the Timor-Leste government, or to new partners. The government’s purchase of a stake in Greater Sunrise followed the establishment of a permanent maritime boundary between Australia and Timor-Leste in March 2018. The agreement allocated 70 per cent of the revenue from Greater Sunrise to Timor-Leste if the LNG is processed there, or 80 per cent if it is processed at an offshore facility.

Processing the LNG onshore is a key ambition of government Special Representative Xanana Gusmao, who was the country’s first president and second prime minister. As Timor-Leste’s key political figure, Mr Gusmao coordinated opposition to the former Fretilin government and brought together the parties of the 2018 AMP government.

The governments that Mr Gusmao led or effectively controlled since 2007 have withdrawn well beyond sustainable amounts from the country’s $17 billion sovereign wealth fund – the Petroleum Fund. Successive budgets have spent between two and three times the sustainable limit, meaning the government has drawn on capital as well as interest from the fund.

Income into the fund is reducing as oil fields in the Timor Sea dry up, with the last field expected to close by 2022. The Petroleum Fund currently pays for 95 per cent of all state activities, which in turn supports more than 70 per cent of all economic activity. Yet at current rates of government spending, the Petroleum Fund will be fully depleted before the end of the 2020s. This outlook has led to – and in turn, is exacerbated by – the government’s push to gamble on investing in Greater Sunrise and the Tasi Mane project.

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The high cost of this development set against a limited financial reserve and its questionable prospects of success have motivated Fretilin and the incumbent Mr Guterres to be more financially cautious. Meanwhile, historical disputes between Mr Gusmao and the three parties he was able to bring into alliance against Fretilin continue to mark their relations, only compounded by increasingly stark differences in their approach to how best secure Timor-Leste’s challenged future.

Damien Kingsbury is Personal Chair and Professor of International Politics at Deakin University. This article is part of an East Asia Forum special feature series on 2018 in review and the year ahead and can be assessed at https://bit.ly/2BrJbH3

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